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Cenovus scales back oil sands growth rate and continues to rein in spending

Cenovus scales back oil sands growth rate and continues to rein in spending

Cenovus reported second quarter earnings of $126 million today, down 80% from the same time last year. The Canadian heavy oil giant remains committed to preserving cash as it cut its dividend, reduced staffing levels and continues to seek operational efficiencies in its conventional and oil sands divisions.

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Oil sands production rose by 5% in the second quarter as compared to the same time last year. Operating costs for the same period fell by 30%. However, the company saw a 10% drop in conventional oil production, which left total oil production relatively unchanged for the year.

Cash flow was reduced to $477 million, down 60% from $1.189 billion reported in the second quarter of last year.

Cenovus is on track to achieve $280 million in cost reductions for 2015, 40% higher than its initial $200 million target. 

The company announced plans to cut 800 positions in February, with 400 jobs to be cut from its Calgary office by the end of 2015. Cenovus will also be reviewing employee benefits and compensation plans and hopes for an additional $100 million in savings from improved work efficiencies.

However, the company warned more cuts may be necessary, noting that more staff reductions are likely coming in 2016 and it may need to renegotiate contracts with suppliers. Full year 2015 capital spending remains unchanged at $1.8 to $2.0 billion.

Cenovus is slowing down expansion plans for its existing oil sands operations and is deferring all future projects until oil prices improve. The company has abandoned its plan to produce 500,000 bpd by 2021 and will no longer pursue the aggressive growth rate it has experienced in the past 5 years. 

QUARTERLY OIL SANDS OPERATING COSTS (GRAPHIC COURTESY CENOVUS)

QUARTERLY OIL SANDS OPERATING COSTS
(GRAPHIC COURTESY CENOVUS)

OIL SANDS OPERATIONS

Foster Creek and Christina Lake produced an average of 150,000 bpd in July, which is above the design capacity of both facilities. Both SAGD facilities are 50/50 joint ventures with ConocoPhillips. The companies already have regulatory approval for a third in-situ project at Narrows Lake.

Christina Lake

  • Production at Christina Lake improved by 6% year-over-year and averaged 144,000 bpd (50% net to Cenovus). The gain was attributed to improved reservoir performance and the start-up of new wells.
  • Steam to oil ratio was reported at 1.7 in Q2, down from 1.8 for the same period last year.
  • Operating costs fell 31% year-over-year to $8.32 per barrel. Oil produced at Christina Lake netted $29.76 per barrel to Cenovus, down 42% from the same period last year.
  • The facility is currently undergoing an optimization project to add more steam capacity and improve oil treatment. The nearly-complete project will bring total capacity at Christina Lake to 160,000 bpd by the end of the year.
  • Construction is progressing at phase F of the project, which should also be completed by the end of 2015. First oil from phase F is expected in mid-2016.
  • The next phase of expansion (phase G) was reported one-third complete but remains on hold.
  • Second quarter capital expenditures at Christina Lake were $161 million, compared to $183 million for the same period last year.
  • An unplanned power outage impacted production slightly in the first half of the year, but full year guidance remains unchanged at 134,000 to 148,000 bpd.

Foster Creek

  • Production rose 3% year-over-year to 116,000 bpd (50% net to Cenovus) despite an 11 day shutdown caused by encroaching wildfires. Phase F continues to ramp up to its full design capacity of 30,000 bpd, which is expected to be reached in Q1 of 2016.
  • Steam to oil ratio was reported at 2.3 in the second quarter, down from 2.6 in Q2 of 2014.
  • Operating costs fell 30% to $13.47 per barrel. Lower fuel costs and improved operating efficiencies contributed to the savings.
  • Heavy oil produced at Foster Creek netted Cenovus $23.77 per barrel, less than half the selling price of Q2 2014.
  • Construction continues to progress at phase G of the facility, which is expected to begin producing oil in mid-2016. The project was reported 75% complete by the end of the second quarter. Phase H is currently on hold.
  • Second quarter capital expenditures at Foster Creek were reported at $73 million, down 65% for the same period last year.
  • Full year guidance for the facility is expected to be between 124,000 and 136,000 bpd (50% net to Cenovus).

Narrows Lake

  • Narrows Lake is the third in-situ venture between Cenovus and ConocoPhillips. The project will employ a solvent aided process, using butane and steam to improve oil recovery.
  • The company spent $9 million on engineering, procurement and camp construction at the facility. Construction has been slowed considerably due to sagging oil prices.

Grand Rapids and Telephone Lake

Although both the Grand Rapids and Telephone Lake SAGD projects already have regulatory approval, investment decisions and timelines were not released by the company at this time.

 
TOTAL OIL PRODUCTION (COURTESY CENOVUS ENERGY)

TOTAL OIL PRODUCTION (COURTESY CENOVUS ENERGY)

 

CRUDE-BY-RAIL UPDATE

Cenovus averaged 6,000 bpd of crude-by-rail sales in the second quarter, shipped to various locations across Canada and the US. Most of the oil originated from Foster Creek, transported to the Bruderheim rail loading facility via the Cold Lake pipeline.

The company also purchased a new crude-by-rail loading facility from Canexus in the last quarter for a bargain price of $75 million. This will help boost crude-by-rail volumes and better connect Cenovus product to the CP and CN rail networks.

FORWARD GUIDANCE

In 2016, the company will consider allocating capital to its deferred Christina Lake phase G and Foster Creek phase H projects. The next priority project is the Narrows Lake oil sands project, which is also currently on hold.

The company has allocated a small amount of capital for its conventional oil assets at Weyburn, Saskatchewan but deferred any expenditures at Pelican Lake and Suffield. 

Cenovus expects the long term oil price to be $65 per barrel by 2017 but plans to remain cash flow positive at $50 per barrel. A detailed spending plan for 2016 will be announced by the end of this year.

The company recently sold its Heritage Royalty Limited Partnership royalty lands for $3.3 billion in July in an effort to raise cash. Cenovus also reduced its quarterly dividend by 40% to $0.16 per share. Cenovus stocks (TSX:CVE) now yields about 3.4%. The stock is currently trading well below is 2009 IPO price of about $29 per share. Cenovus became a publicly traded company when it split its oil assets from Encana in December 2009, leaving Encana as an almost-pure natural gas player.

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